What the Heck Happened to Cisco?

To say that Cisco (Nasdaq: CSCO) shook the market with its dismal guidance may be an understatement. Guidance from the tech-bellwether has its stock down 15 percent and the tech-heavy NASDAQ down 1.5 percent today.

Specifically, Cisco said it now sees Q2 sales up 3-5 percent, which implies $10.11-$10.31 billion, well below the consensus of $11.08 billion. The company sees Q2 EPS $0.32-$0.35, also below the consensus of $0.42. For the year, Cisco sees sales up 9-12 percent, basically suggesting the back two quarters will make-up for the near-term weakness.

So what happened to causes such a disaster? While Cisco would like investors to believe market forces were at play, others think it may be more company-specific.

Cisco's lower outlook was due to weaker than expected trends in the public sector, challenges in the set-top box business and weak demand in Europe.

In the public sector, Cisco said US state government business orders were down 25% year-over-year and 48% quarter-over-quarter.

In set-top boxes, the North American cable segment is under pressure with orders down 40 percent year-over-year. Challenges at Time Warner are sad to be to blame.

Sales in Europe were up 11 percent, a big slowdown from the 29 percent increase last quarter. Product orders also slowed to up 2 percent, from up 25 percent last quarter.

Switching was down 1.5% quarter-over-quarter, the second sequential decline, and the runrate of its flagship next-gen Nexus switching line was $1.5 billion, down from $2 billion cited last quarter.

Analysts at Goldman Sachs believe the disappointing guidance was related to one company-specific factor (share loss in the US cable set-top box space) and two market factors public sector spending and weakness in Europe).

Goldman believes that Cisco's growth drivers at this point in its life cycle are more cyclical than secular. "With the cyclical refresh in networking now largely behind us it is difficult for the company to grow," they state. All companies face the same macro challenges, but those with strong product cycles, like Juniper (Nasdaq: JNPR), and close alignment with secular growth themes, like Acme Packet (Nasdaq: APKT), Aruba (Nasdaq: ARUN), Qualcomm (Nasdaq: QCOM), Riverbed (Nasdaq: RVBD), are able to over come them.

Cloud Computing also continues to be disruptive to Cisco's core switching franchise, which is 1/3 of sales, Goldman notes. The firm kept its Neutral rating on the stock and cut its price target from $25 to $23.

Analysts at Kaufman Bros were more upbeat and noted that this is not the first time the company has experienced a setback. "In the past, the company responded well to adversity and bounced back within a few quarters," analyst Shaw Wu said. He is maintaining a Buy rating, but lowered his price target from $28 to $27.

Ticonderoga lowered their price target from $30 to $28, but also kept a Buy rating. "We believe Cisco's financial strength, acquisition savvy and continued innovation should position the company better coming out of this challenged environment", the firm said.

Canaccord Genuity cut their price target from $27 to $25.50, but kept their Buy rating. The firm sees limited downside.

Deutsche Bank didn't give Cisco a break and cut their rating from Buy to Hold and cut their price target from $28 to $22. The firm is concerned that new products may not be able to ramp fast enough to offset normal price declines and macro pressures elsewhere.

In addition to the Deutsche Bank downgrade, Lazard, William Blair, Wunderlich and Mizuho also downgraded Cisco today.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• IG Group Holdings (IGG:LN) (IGGHY) PT Raised to GBP20 at Deutsche Bank
• Morgan Stanley Downgrades Sawai Group Holdings Co., Ltd (4887:JP) (SWPIF) to Equalweight
• Piper Sandler Assumes Medallion Financial (MFIN) at Neutral